In the developing world, RIM makes its last stand

Staff wait for customers at the grand opening of Research In Motion's first official BlackBerry store in Lagos, Nigeria.

Iain Marlow/The Globe and Mail

IAIN MARLOW

TECHNOLOGY REPORTER

LAGOS

March 26, 2017November 10, 2012

Steven Kumbin walks through torn-up, pot-holed streets, steps across an open sewer filled with rotting garbage and enters one of the many mobile phone shops crammed into this ramshackle neighbourhood of Lagos known as Computer Village.

Outside, the roads are filled with honking motorcycle taxis, dented minibuses and damaged cars shipped here from the West. Near a toppled cement pole and its twisted electrical wires, young men lounge next to wooden carts loaded with black jerry cans of drinking water, stark signs of the city's – and Nigeria's – lack of basic services and infrastructure.

But inside the phone shop, Mr. Kumbin could be anywhere.

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Large displays of mobile devices from Samsung Electronics Co., Nokia Corp. and Research In Motion Ltd. gleam down at him, as a dozen neatly dressed sales assistants stand ready to help. A 23-year-old student who works part-time as a driver to Lagos's wealthier citizens, Mr. Kumbin is exactly the type of customer these smartphone makers are trying to reach in the developing world, where a fast-rising middle class spells huge opportunity.

For shoppers in Lagos, though, the choice for a wireless device is an easy one.

"Every young teenager's dream is to own a BlackBerry phone," Mr. Kumbin says. "It's very popular with students, businessmen. But more people are buying BlackBerry – more people come for it everyday."

In countries such as Nigeria, far from the iPhone-toting masses of the developed world, BlackBerry remains king among smartphones.

The BlackBerry is not only the No. 1 smartphone in Nigeria, but it's also tops in all of Africa, according to research firm Canalys. The story is much the same in Mexico, Indonesia and many of the world's other booming emerging markets, where RIM leads nascent smartphone sectors with as much as a 60-per-cent market share.

It's the kind of dominance that RIM enjoyed for years during its uncontested heyday in North America, before the arrival of wildly popular iPhones and Android phones sent the BlackBerry maker into freefall.

As Apple Inc., Samsung and other global giants clobber RIM's market share in the Western world, RIM's sales are plunging, profits have turned to gushing losses, and its stock price has collapsed by about 95 per cent from its 2008 peak.

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Now, enormous frontier countries such as Nigeria are critical for RIM's desperate battle to survive. Thanks to a good head start abroad, international markets today account for nearly 60 per cent of RIM's revenue. It's crucial that RIM gets this right, and avoids the missteps that contributed to the BlackBerry's struggle in the West. By pushing hard to keep its lead in new foreign markets, RIM could not only secure lucrative footholds in regions with years of strong growth ahead, but buy the company time to rebuild its business in North America with its next-generation devices slated for launch early next year.

The developing world, in short, is RIM's last chance.

But even if RIM has talked up the promise of international growth throughout its recent struggles, these various emerging markets are far from static. They are risky, volatile, fast-changing places. Companies need to fight relentlessly to sustain success. And as competition crashes into these markets, the battle for customers like Mr. Kumbin – and the hundreds of millions of others like him – is getting more intense.

Indeed, though Apple doesn't have a store anywhere in Nigeria, it has recently struck some local retail partnerships and its devices are starting to pop up.

Mulling the phone he may choose next, Mr. Kumbin muses: "I like the iPhone, too."

'THIS IS THE PLACE TO BE'

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With more than 170 million people, Nigeria is Africa's most populous nation. About one out of every six Africans is Nigerian. The BlackBerry has proven especially popular with African youth, and Nigeria just happens to be an incredibly young country: Roughly 40 per cent of the population is aged 14 and under.

The country also boasts the continent's second-largest economy after South Africa, and one that is growing rapidly. A Citigroup economist predicts Nigeria's economy will grow at an average rate of 6.9 per cent until 2050. Because there's almost no land-line phone infrastructure, mobile growth has been explosive. There are roughly 100 million mobile phone SIM cards out there, although the number of actual users is something far less since networks are so congested that many people carry multiple phones.

"This is the China of Africa, this is the place to be," says Olu Akanmu, chief marketing officer for wireless carrier Airtel in Nigeria. "The market is competitive, but the potential is extremely huge."

The upside for smartphone makers in this almost untapped market is especially large. There are only about four million smartphones, officially, in Nigeria – and two million of those are BlackBerrys.

That's why Robert Bose, a silver-haired RIM executive in rimless glasses, is climbing into a black SUV at the head of a convoy guarded by enormous Nigerian security personnel at the luxury Federal Palace Hotel & Casino. With four-ways flashing and a police escort, they rumble past the sand-bag-stacked bunker on the hotel's manicured front lawn and into the streets of central Lagos.

Global technology giants are chasing an opportunity that is well worth the hassle; it is the smartphone version of the colonial powers' scramble for Africa, now the world's fastest-growing wireless market.

And if Lagos is Nigeria's beating heart, its main arteries are absolutely clogged. After grinding through the chaotic traffic of sub-Saharan Africa's largest metropolis for more than an hour, partly along a raised highway with broken guardrails hanging off its side, Mr. Bose's convoy pulls into a ramshackle neighbourhood near the international airport.

It's Computer Village. This is where much of Lagos comes to buy the mobile phones that keep this entrepreneurial city bustling, despite the fact executives are often stuck in hours of gridlock every day.

RIM's executives aren't here for the jollof rice: They're here to nail down a country-specific strategy that will prolong the company's early momentum. Right now, Mr. Bose, RIM's regional managing director for the Middle East and Africa, is traipsing out to Computer Village to open an official BlackBerry store.

"I don't think you can underestimate the importance of the developing world, the emerging-markets business that we have, on RIM's results," Mr. Bose says. "The company recognizes that. And that's why we're willing to invest, and willing to do the things we're doing here in Africa, to keep that going."

GENERATING A GRASSROOTS BUZZ

Chidera Anukam is an 18-year-old student in Lagos with dyed purple highlights and 1,002 friends on BlackBerry Messenger. She uses RIM's proprietary texting service to blast out party invites to all her BlackBerry-using peers. If you don't have a BlackBerry, you're unlikely to hear from her. "It's very, very fashionable to have a BlackBerry," she says, "especially if you have fancy pouches and, maybe, bedazzles on it, like mine."

In Nigeria, comments like this are common, but in Ms. Anukam's case, they are also officially sponsored. She is one of three BlackBerry ambassadors at the University of Lagos, and went through six arduous auditions for the privilege.

She's responsible for creating an ostensibly grassroots buzz about BlackBerry by hosting parties around soccer matches and sponsoring events such as music competitions – the winner of one is being sent to a music school in London. There are teams of three students in each of the major Nigerian cities of Lagos, Port Harcourt, Calabar and Abuja, the capital. It is just one of the local strategies RIM is pursuing to maintain buzz as more people in Nigeria, especially young people, upgrade from "dumbphones" to smartphones.

Previously, the RIM team handling Nigeria was based out of Johannesburg, around 4,500 kilometres away in South Africa. Executives would make the roughly six-hour flight every few months to meet with carriers and manage the blossoming business. It was clearly not enough: RIM needed people on the ground. In late September, RIM officially opened an office in Lagos.

"In North America, and perhaps Europe, everything is done by contract, whereas here a lot of value is still placed on relationships," says Waldi Wepener, RIM's regional director for East, Central and West Africa. "We've decided to open an entity here so we can get closer to our customers and have more regular face-to-face meetings with them and build those relationships."

But to win lots of new customers, prices must be kept low – a sign of the difficulty ahead for RIM to make good profits in the developing world.

With Nigeria's carriers, such as Airtel and MTN, RIM has negotiated low-cost, monthly data plans like the 30-day, BlackBerry Complete plan that costs only 1,400 Naira (less than $10). Even cheaper, at 1,200 Naira, is a BlackBerry Social plan that gives access to BBM, Facebook and Twitter.

Dayo Olutunfese, a Lagos tech blogger, notes that a monthly BlackBerry plan is roughly one-tenth the price of regular Internet plans. "Internet access is still expensive in Nigeria, but with BlackBerry you can have access to the Internet, 24 hours a day," Mr. Olutunfese says. "The price (of the device) is still on the high side for the everyday Nigerian, but believe me – everybody wants a BlackBerry in Nigeria."

Opening an office here also allows RIM to catch up with larger global rivals Nokia and Samsung in terms of offering support to customers. It is hard to overstate the impact of a broken mobile phone in a place like Nigeria. In a place with few laptops, PCs or home phones, many Nigerians may have no other connection to their family, friends or business contacts.

This is exactly what has happened to Mr. Kumbin, the student, who is now in a store brimming with dozens of competing devices. The potential to lose a customer quickly, to lose market share, is all too real.

"I like it, but it fell out of my hand and it didn't work – I brought it here and they can't do anything," Mr. Kumbin says, holding his non-functioning BlackBerry in the store in Lagos's Computer Village. "Samsung, Nokia, they have people here. You have a problem, and you bring it to them."

As he complains that there is no RIM store, RIM executives are around the corner, opening one. RIM has also hurried to open 60 software upgrade centres across Nigeria, which allows customers to install the latest software – something many can't do on their own. It underscores how fast these markets can change, and how little time there is to cement the gains.

CHALLENGING THE GREY MARKET

RIM's financial results have been disastrous in recent quarters. A billion-dollar profit in the first fiscal half of last year turned into a three-quarter-billion loss in this year's first half. The battered stock price has left it vulnerable to a takeover. But RIM's $2.3-billion (U.S.) of cash and investments gives the company time to right the ship.

Even if the country is challenging, RIM executives love Nigeria, where there's an almost absurd enthusiasm for BlackBerry.

The most visible display is a film franchise called BlackBerry Babes . Produced by Nigeria's prolific "Nollywood" film industry, it is based entirely around women wooing men into buying them BlackBerrys. In a typical scene, a woman pushes back a man who keeps trying to kiss her. "I've been begging you to buy me an ordinary BlackBerry, and you're not saying anything," she says, lying on a teal-coloured bed. The man, exasperated, asks how much this is going to cost him. "Depends on the model," she replies coolly. "I want the highest one."

Unfortunately for companies such as RIM, the entrepreneurial merchants of Lagos, aware of their customers' income levels, feed a thriving "grey market" composed of older, second-hand BlackBerrys imported from markets such as the United Kingdom, as well as hammered-together refurbished BlackBerrys, none of which boost RIM's hardware revenue. And the grey market – which could account for upward of 60 per cent of all the phones sold here – does not even count the traders who fly to Hong Kong, stuff fake "BlockBerrys" in suitcases, and sell them here to those who want but can't afford even used BlackBerrys.

Lagos is a hustle-or-be-hustled city. And RIM's Mr. Bose is out in Computer Village to make sure RIM doesn't get hustled.

It's the epicentre of Nigeria's grey market, and he's opening an official store meant to crack down on unauthorized sales, and ramp up official ones. As he arrives, there is already a bustling crowd gathered outside. Two locals, hiding around the side of the building, are holding up the ends of a novelty red ribbon. A local retail partner's wife, decked out in a leopard print jacket, jumps in front of the awaiting cameras to pose with RIM's executives. As he walks in the hot, dusty air past very unofficial-looking BlackBerry vendors and stands selling used PC printers, Mr. Bose sweeps his arm out in a semi-circle and huffs, "You asked about challenges?"

COMPETITION LOOMS

On Nigerian radio, RIM's competition is already coming in loud and clear.

"No power?" a booming, baritone voice yells in one commercial. "No problem!" It's an advertisement for a fridge made by Samsung, the vertically integrated South Korean conglomerate with around 220,000 employees. This particular fridge, with three hours of backup power, has been custom built for Nigeria's daily power outages. And in a sign that the company is dead set on taking share: The fridge comes with a free Samsung smartphone.

Though RIM has a head start, it's a much smaller company, and getting smaller. The Waterloo, Ont., firm will have only 11,500 employees by the time its current layoffs are through.

So as RIM shrinks, it will be hard pressed to grow – in an increasingly global, increasingly commoditized business, and against companies more than 10 times its size.

And in these far flung locales, RIM is up against the industry's grizzled veterans. Nokia, though troubled as well, has run a high-volume, low-margin business through these rough-and-tumble markets with a sophisticated global supply chain for years. And Samsung, with a broad product range, has the scale to have repair centres scattered across Nigeria.

RIM knows that's a tough game to play. "Look, at the end of the day, it would be nice to have people in every corner of Nigeria, but ... I don't think that's realistic," says RIM's Mr. Wepener. "We're not always going to look to match every single competitor in terms of the number of resources. To us, it's important is to make sure that customers get the best experience, and if they don't, to look at how we address the gaps."

There is a long runway for RIM's growth here, but others are moving just as fast, or even faster. According to data from global research firm IDC, RIM shipped around 222,000 devices in Nigeria in the second quarter of this year, up from 130,000 in the first quarter. Samsung shipped 72,000 smartphones in the second quarter, up fivefold. That cut into RIM's market share, which slipped to 64 per cent from 68 per cent.

But the crucial question is: Can RIM make a solid profit in the developing world? Already there are signs that competition is cutting into profitability abroad. As RIM's international sales climb, its profit margins have dropped.

International markets have grown to about 60 per cent of RIM's revenue in fiscal 2012, up from 27 per cent in fiscal 2010, notes Byron Capital Markets analyst Tom Astle. Over the same period, RIM's gross profit margins dropped to 36 per cent from 44 per cent.

"Competition from low-end Android phones has been a recent factor in all regions," including North America, Mr. Astle says. "But the product mix/price pressure in international markets would be a big part of the decline in margins over the last few years."

And RIM is not just up against developed world rivals in these markets. When RIM CEO Thorsten Heins refers to "pressure" in emerging markets, he is mainly talking about Chinese companies such as Huawei Technologies, ZTE and Tecno. Few Westerners have heard of such names, but Tecno, for example, is ranked by IDC as the third-largest provider of simple mobile phones in Nigeria, behind Nokia and Samsung.

"The Chinese phones here are crazy, and they're very aggressive – unknown brands you've never heard of," says Wael Ammar, chief commercial officer of Nigeria for Etisalat, a major Middle East and Africa wireless carrier. "This is the new wave of smartphones."

For investors, and Canadians who care about RIM's destiny as an independent public company, it is clear RIM hopes emerging markets can help sustain the company through a brutal transition that has shaken the company's top management and led to about 7,000 layoffs since the summer of 2011.

Unlike in North America and parts of Western Europe, RIM has not yet had its momentum halted by rivals' success, explains IDC mobile analyst Kevin Restivo.

"There's absolutely a business in what they're doing, and there will be a business for the foreseeable future," Mr. Restivo says. "There's significant growth in all these markets, but RIM has to pick and choose its spots in order to maintain its growth. ... There's no escaping the global smartphone heavyweights."

Customers in the developing world are typically not the high-margin corporate users RIM built its business on. They are much lower-margin consumer users who often purchase lower-cost or second-hand phones and are frugal about monthly plans.

Even as RIM has soared in international markets, the commoditization of devices has weighed on wholesale prices of BlackBerrys, which have fallen to about $229 in August of this year from about $370 in 2009.

Jefferies & Co. analyst Peter Misek says getting good margins in markets such as Nigeria requires a lot of effort. "If they execute, engineer and scale, they can have reasonable margins," he says. "Will they have good margins? That depends. ... You have to be really, really smart. You have to have crisp execution. And you have to have amazing management."

At RIM, according to one former executive familiar with management's thinking, there is now cold realism about these markets' potential, as opposed to two or three years ago. RIM was displacing Nokia as the aspirational brand of choice in many countries, but RIM's top executives are well aware of the risks.

"They were bombing Nokia in those markets, but you go from being the bomber to being the bombed – and things move quite fast now," the executive said. "It's the way of the beast. It's consumer electronics. ... Do they perceive that this can last forever? No. They know they have to refresh it."

That's why RIM's slick new BlackBerry 10 phones, meant to come out early next year after numerous delays, are so important, even in emerging markets: They must keep the momentum going.

RIM's Mr. Wepener maintains that, given Nigeria's demographics, "if you can hang on to market share, you'll grow anyway" because the largely untapped market is getting bigger, richer and shifting to higher-value smartphones all at the same time – a rising tide lifts all boats argument. But that was also RIM's thinking when the iPhone first hit the scene in North America. Even though smartphone growth was exploding, RIM's share of that growth crumbled.

For the near term, RIM's growth is all but assured: For trend-conscious Nigerians like Ms. Anukam, the student ambassador, it is simply incomprehensible to think of using another smartphone. But she, and the Nigerian market more broadly, will eventually mature. And maturing markets dropped RIM in the past.

"I don't see why somebody would say BlackBerry is not cool," Ms. Anukam says. "Anyway, I haven't used any other phone. I've been stuck with this for, like, four or five years."

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INVESTING DESPITE THE RISK

Inder Bajaj knows a bit about emerging-market risk.

The telecom industry veteran worked at two of the largest wireless companies in India – hardly the easiest market in the world – before coming to Lagos, where he heads up Helios Towers, a company that manages more than a thousand communications towers across Nigeria.

First, there's Nigeria's constant power outages. Like most buildings in Lagos, Mr. Bajaj's office runs mainly on diesel generators. And his towers are no exceptions: Even cell towers in the most remote locations need to have a constant supply of diesel in order to function; that means trucks, bumping along pot-holed, flooded roads. If he can manage to keep theft of his diesel to about 10 per cent, he says, he's doing a good job.

Then there's Boko Haram: The extremist Islamist group in Nigeria's arid, mainly Muslim north has been setting off car bombs and blowing up churches – and recently started targeting cell towers. "In the last month, we've had attacks on three of our towers," Mr. Bajaj said in late September. "We have (diesel) tanks with three to four thousand litres at the site, so if you use fire, it's easy."

Of course, the risk here is part of the huge potential to be found in Nigeria's massive population of about 170 million people. Wireless industry executives like Mr. Bajaj have piled into Nigeria as the industry has taken off.

Rick Rogers, a telecom executive with a decade of experience here, says Nigeria is at a point where the government needs to privatize operations or plunge more investment into decaying infrastructure and poorly delivered services if the country wants to modernize further. (Of course, privatization in a country with as much corruption as Nigeria is not always a quick and easy solution.) "There's a lot of structural problems here to get over – sustainable government investment would be a good start. ... Investment in health. Education should be a priority." They should privatize power distribution, road infrastructure, airports, ports." To enable investment, you need infrastructure." If the public sector's not investing, how do you move forward?"

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